PMI Group CEO Discuss Q3 2010 Results - Earnings Call Transcript

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 |  About: PMI Group, Inc. (The) (PMIR)
by: SA Transcripts

PMI Group, Inc. (PMI) Q3 2010 Earnings Conference Call October 28, 2010 12:00 PM ET

Executives

Bill Horning - VP of IR

Steve Smith - Chairman and CEO

Don Lofe - CFO and CAO

David Katkov - EVP and CBO

Analysts

Matthew Howlett - Macquarie

Steve Stelmach - FBR Capital Markets

Conor Ryan - Deutsche Bank

Alan Connor - Spectrum Advisory Services

Donna Halverstadt - Goldman Sachs

Mark DeVries - Barclays Capital

Edwin Roshan - Height

Operator

Hello and welcome to the third quarter 2010 earnings call for the PMI Group. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions)

Now, I will turn the meeting over to Mr. Bill Horning, Vice President of Investor Relations. Sir, you may begin.

Bill Horning

Thanks Jeremy, and good morning. Welcome to the PMI Group's third quarter 2010 financial results conference call. Today's call will begin with comments from Steve Smith, PMI's Chairman and Chief Executive Officer. Mr. Smith will discuss PMI's overall financial results as well as other matters for the third quarter. Don Lofe, PMI's Executive Vice President, Chief Financial Office and Chief Administration Officer will then address other business results for the quarter, as well as other financial and capital matters. We also have with us today, David Katkov, PMI's Executive Vic President and Chief Business Officer, who along with Steve and Don will be available to answer your questions following today's prepared remarks.

On today's call, we'll be referencing non-Generally Accepted Accounting Principle measures, such as net operating income, which under SEC Regulation G, we are required to reconcile with GAAP. These reconciliations of these measures with GAAP financial measures are available on our website.

Before I begin, I would like to review the company's Safe Harbor statement under the private securities litigation reform act of 1995. During this call, we will be making forward-looking statements. Actual results may differ materially from the statements made during this call. The company's business depends on investment considerations, which are highlighted in our Securities and Exchange Commission filings, including our 2009 Form 10-K and our most recent Form 10-Q. Our Forward-looking statements are made as of today, October 28th, 2010, and we undertake no obligation to update such statements except as may be required by law.

With that, I'll turn the call over to PMI's Chairman and Chief Executive Officer, Steve Smith.

Steve Smith

Thanks, Bill, and good morning, everyone and thank you for joining today's call. In the third quarter, the PMI Group had a net loss from continuing operations of $281.1 million or a loss of $1.74 per share. Our results for the third quarter included a $200.2 million increase in our valuation allowance related to our deferred tax assets.

In the course of our quarterly evaluation of our deferred tax assets, we determined that this increase was necessary under current accounting guidance. As Don will further discuss, the factors necessitating this increase included losses beyond our expectations in 2010 and the uncertainties we face with respect to the future level of losses and economic conditions.

This increase represents a non-cash expense and affected only our GAAP results and not our statutory financial statements. Approximately $1.24 of our third quarter loss per share was attributable to the increase in our valuation allowance. Our consolidated results were also driven by US Mortgage Insurance operation losses and loss adjusted expenses or LAE of $317.1 million in the third quarter.

Before reviewing our results in more detail, let me take a moment to discuss two recent actions that have generated a lot of attention. First was the FHA price increase in early October, while we don't expect that this will have an immediate impact on our new insurance written, we are pleased by this change, which we believe makes our MI product more competitive and is an important part of shifting market share back to private mortgage insurers.

Second, foreclosure moratoriums previously instituted by several servicers has introduced an element of uncertainty, as to when foreclosures may occur in various states. Certainly if these moratoriums delay the foreclosure filings and the transfer of title to our insured, this will lead to a delay in the payment of claims. However, our current expectation is that these foreclosure moratoriums may delay the payment of future claims, but is unlikely to reduce our risk exposure.

As mentioned, US MI net loss was driven by continued high losses and associated loss adjustment expenses. Let me update you on several factors affecting US MI losses. First, primary new notices of default or NODs received in the third quarter total 29,715, which is up only slightly from the second quarter, the better than what historical seasonality factors would have indicated.

New NODs received through September 30, 2010 totaled 92,580. This was down approximately 25% compared to the same period one year ago. Second, total claims paid were approximately $323 million in the third quarter, which is down 27% from the second quarter, but up 19% from the first quarter of this year, while the level of paid claims continues to vary quarter-to-quarter, the total of $1 billion paid through the first three quarters continues to be within our expectations.

Third, cures, which are a significant assumption within our loss reserving process, were lower than we expected from NODs that when inventory at 12/13/2009. This lower level of cures from the previously delinquent book were driven by the following factors, continued high levels of unemployment, ongoing stress in the housing markets, particularly with regard to pressure on home prices, and growing strain in the ability of our servicer customers to find retention opportunities for those borrowers.

Due to these factors, we lowered our future expected cure rates, which represented an adjustment of approximately $117 million to our loss reserves on previously delinquent loans.

Finally, PMI losses in the quarter were also affected by a rescission in denial activity. The aggregate dollar amount of delinquent primary and pool risk in force rescinded or denied in the third quarter of 2010 was approximately $209 million.

Third quarter activity was similar to our experience in the second quarter. And our expectation is that rescissions have peaked and will continue to climb from 2009 levels, yet denials will continue to remain elevated for some time.

Primary loans in default at September 30, 2010 total 131,891, down from 138,431 at June 30, 2010 and 150,925 at December 31, 2009. Our primary delinquency rate at September 30, 2010 was 20.4%, down modestly from 20.8% at June 30, 2010 and 21.4% at year end 2009, while we expect our default inventory and default rates to remain relatively high through 2010, we believe that new delinquencies from our 2005, 2006 and 2007 primary book years have peaked.

Our default inventory has declined sequentially in 2010 and we currently expect this trend to continue into 2011, potentially subject to seasonal fluctuations. Let me take a few minutes to discuss PMI's loss mitigation efforts in more detail.

For the third quarter, loan modifications of payment plans enable 9,674 PMI insured borrowers, representing approximately $451 million of risk in force to retain their homes. Of those retentions, 2,265 loans, representing approximately $115 million risk in force were reported as HAMP modifications, while 5,474 were traditional non-HAMP loan modifications, representing approximately $256.2 million of risk in force.

Payment plans accounted for the remaining 1,935 borrowers and approximately $80 million of risk in force. As of September 30, 2010, 10,739 loans were in active HAMP trial period compared to 18,079 loans as of June 30, 2010.

Overall, approximately 18% of our total delinquent loans were in a HAMP or non-HAMP workout program at the end of the third quarter, while HAMP has been declining, our business as usual or non-HAMP modification have remained elevated. Also, we have seen that affordability based modifications, which lower borrower's payments have a lower incidence of re-default than prior modifications that did not lower a borrower's payment.

While the number of modifications are expected to decline from previous levels, we expect that both HAMP and non-HAMP modifications will continue to positively effect our delinquent loans.

Now, let me briefly talk about new business writings. There have been modest increases throughout the year in the mortgage insurance industry share of the originations market. As anticipated, we're experiencing a slow move back to private mortgage insurance and this trend should continue into next year. PMI's market share relative to our competitors has also shown modest increases. These increases in market share have come without any reductions in our credit standards.

Our credit quality remains historically strong and our belief that these new business writings will be highly profitable. In the third quarter, our US Mortgage Insurance Operations wrote approximately 2 billion of new insurance written, an increase of 28% from the second quarter writings and 108% increase over the business written in the first quarter of this year.

With the year-to-date, new insurance written at $4.5 billion, we currently expect to write approximately $6.5 billion to $7 billion for the year. As of September 30, 2010, our primary insurance in force totaled $104.6 billion, while primary risk in force was $25.6 billion. Both were down modestly from the end of the second quarter. Pool risk in force September 30 was $624 million, a $204 million reduction from the prior quarter. We executed another termination of modified pool policies equal to $184 million of risk in force or a fee of approximately $27 million.

As a result of these restructurings, our modified pool risk with deductibles risk in force net of reserves has been reduced to $91 million.

Now, let me turn the call over to Don to cover additional details of the third quarter results as well as other capital and liquidity matters. Don?

Don Lofe

Thank you, Steve, and good morning. With regard to our consolidated financial results, and as Steve mentioned in his remarks, a reported loss from continuing operations for the third quarter of 2010 was $1.74 for basic and diluted per share and was primarily driven by incurred losses in our US Mortgage Insurance Operations and the increase in our valuation allowance for our deferred tax assets.

The loss associated with this valuation allowance resulted in an approximate $200 million negative effect to our third quarter results or a loss per share of $1.24. Now, as many of you are aware, the deferred tax asset represents timing differences in the recognition of certain tax benefits, including the expected value of future income tax savings when the company offsets its future taxable income with the carry-forward of its net operating losses.

Now, let me spend a few moments discussing why we increased the valuation allowance during this quarter. After the first quarter of this year, we had exhausted our tax and loss bond, which generates taxable income. During the second and third quarter, we experienced loss development in excess of our expectations and we do not currently expect our US MI segment to report an operating profit in 2011.

Accordingly, as of September 30, 2010, accounting guidance required us to rely solely on tax strategies that are not dependent upon the generation of US MI taxable income in support of our deferred tax assets. These series of events necessitated the company's increase in the valuation allowance during the third quarter.

As of September 30, 2010, the net deferred tax assets were approximately $142 million and we do not expect any further charge against these assets. We expect to realize, though, $82 million of the $142 million upon the maturation of the QBE note and the associated profit sharing component of the reinsurance on the related insurance portfolio in September, 2011.

We expect almost the entire amount of our deferred tax assets gross of the valuation allowance of $453.1 million will be recovered in the future, but not before we return to a period of sustained profit. Prior to that time, we expect future losses to increase the gross deferred tax assets and the corresponding valuation allowance.

Finally, and as Steve mentioned, it is important to note again that the increase in this valuation allowance affect only our GAAP financial results and not our statutory financial statements. This is due to statutory accounting rules that significantly limits the capital credit received from deferred tax assets. So, this reduction to our deferred taxes had no effect on our statutory capital.

Now, let me take a few minutes to discuss the results of each segment in more detail. Within the US Mortgage Insurance Operations, we had a net loss of $251.6 million in the third quarter of 2010, as compared to a loss of $110.6 million in the third quarter of last year.

Our third quarter results compared with the same period one year ago were primarily driven by an increase in the above mentioned deferred tax valuation allowance of $181 million, net realized investment gains from the sale of our tax advantage municipal bonds, lower incurred losses in other underwriting in operating expenses offset by lower premiums earned.

Now, first, let me address the reserves for losses in LAE at the end of the third quarter 2010. The total decrease to our gross reserves for losses during the third quarter was approximately $97 million. At September 30, 2010, our gross reserve for losses and loss adjustment expenses stood at approximately $3 billion.

For the primary portfolio, we decreased gross reserves by approximately $92 million on June 30, 2010 due to a decrease in a primary default inventory related to the decline in new notices of default, continued cures of delinquent loans and the payment of claims, full reserves decreased by approximately $5 million.

Total claims paid including loss adjustment expenses were approximately $323 million for the third quarter, down from the second quarter's paid claims of $444.3 million. The decrease from the second quarter was primarily driven by the lower pool claims paid which included restructuring payments.

For the first nine months of 2010, total claims paid including LAE totaled approximately $1 billion, compared with approximately $854 million for the same period one year ago. The increase versus the prior year is within our expectations of higher claims paid in 2010, as delinquent loans work their way through the system.

As Steve discussed, we made adjustments to our loss reserves for unresolved delinquent loans in the third quarter. If you look at page 15 in our financial supplement, you will see our loss reserve roll forward. The two primary categories are losses and LAE incurred of $317.1 million, which were expense in our income statement in the third quarter and claimed payments of approximately $323 million.

With regard to our incurred losses of $317.1 million, $199.7 million was attributable to loss reserves established for defaults occurring in the current year. Most of these reserves were established for our primary new notices of default and to a much lesser extent reserves for new pool notices of default received this year.

The $117.4 million of lost reserves established for defaults received in prior years largely reflects primarily the adjustments we made this quarter for lower future expected cure rates.

Now, with regard to the statutory capital PMI Mortgage Insurance Company, it ended the third quarter with a risk to capital ratio of approximately 17.2 to 1, an excess minimum policyholder position of approximately $332 million.

Now, moving to our international operations, the segment reported net income for the third quarter of 2010 of $2.6 million, compared to a net income of $22.1 million in the third quarter of last year. Net income for the quarter was driven by lower incurred losses and operating expenses partially offset by lower premiums earned. PMI Europe ended the third quarter with $2 billion of risk enforced compared to $1.9 billion at the end of last quarter and down significantly from $5.3 billion at the end of the third quarter 2009. The increase in the risk in force in June 30, 2010 was entirely due to foreign currency change effects. We expect further stabilization of risk in force which will position PMI Europe and PMI Canada to repatriate capital in PMI Mortgage Insurance Company as early as the first half of 2011.

With regard to holding company matters, the PMI Group ended the third quarter with available cash and liquidity investments were approximately $79 million. As in prior quarter, let me update you on the value of the pledged note related to our sale of PMI Australia or what we referred to as the QBE note.

At September 30, 2010, the noticeable value of the QBE note was approximately $201 million, representing the original principal amount of $187 million plus the accrual interest since October 2008. Assuming full pay out of the note, we will realize at maturity in September 2011, $208 million, which includes accrual interest. This note is currently an off-balance sheet asset due to certain contingencies.

As you may recall, the amount we ultimately receive under the QBE note is subject to actual and projected loss enforcement of PMI Australia's policy in force as of June 30, 2008. We do not expect as of September 30, 2010 the ultimate projected losses in this portfolio will trigger any reduction in the QBE note value.

Given the recent performance of the Australian housing market and the continued run-off of this portfolio and its seasoning, we expect full repayment of the note at maturity. Assuming full payment of the note in September 2011 and the effect of the associated taxes, we would expect to see an increase in our book value at that time of approximately $0.84 per share.

Additionally, assuming repayment of the QBE note, PMI Mortgage Insurance Company will realize two capital inflows. First PMI Mortgage Insurance Company is party to an excess of loss reinsurance agreement in connection with the sale of PMI Australia. On full payment of the QBE note, PMI Mortgage Insurance Company will receive proceeds from the reinsurance profit sharing agreement of approximately $25 million. And secondly, per the agreement, PMI Mortgage Insurance Company sold the QBE note to the holding company, holding company receives the proceeds of the note, it will downstream $25 million to PMI Mortgage Insurance Company.

And finally, I would like to direct those interested in a reconciliation of our consolidated net loss to our consolidated net operating loss to review the disclosure material posted on our website. As presented in the reconciliation on our website, our consolidated net operating loss in the third quarter of 2010 was $332.3 million or $2.06 per common share.

With that, let's open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Matt Howlett, Macquarie. Your line is open.

Matt Howlett - Macquarie

Hi guys, thanks for taking my question. Just getting back to the loss expense line, the $117 million in reserve built from, I guess, prior years, how do we look at that going forward, if there's no other adjustment to the reserves? Do we look at the incurred loss line being sort of $199 million is that sort of the run rate all else being equal?

Steve Smith

Matt, this is Steve. We've taken the adjustment that we thought was appropriate for those prior delinquencies in the 2009 prior book, but obviously, we are monitoring that very carefully in terms of if there's any upward pressure, so I can't assure you that there would be no future adjustments relative to that, but we did take the charges that we thought were appropriate in the third quarter.

Obviously there continues to be stress in the overall economy in terms of jobs, as well as uncertainty relative to home prices. But in terms of new NOD development and what we've seen in that, what we've seen in that part of the total incurred, we have seen new NODs generally stable, as we indicated, for the third quarter versus the second quarter and our expectation would be similar results, maybe slightly high, but similar results in the fourth quarter for new NODs.

Matt Howlett - Macquarie

Great, got you. And then, with your reserving methodology, what do you take in account in terms of mod cures? I know you mentioned 18% were in, HAMP trials or alternative mods. I guess the first question is how do you have that information, the alternative mods, where the other MIs because they don't have that reporting information? How do you guys get it? And then, what are you assuming in terms of cure rates for those mods? Is it just baked into a general cured assumptions or is there some type of specific cure rate you attribute to the mods?

Steve Smith

We do develop our view on the business as usual modifications and we implemented actually I think it was several years ago requiring servicers to report that information to us and I think we may have been one of the first MI companies to have actually done that and to track the data. So, we do have a pretty good trend development in terms of how the lender modifications outside of HAMP are tracking.

And as we indicated, that continues to be at a relatively high level in terms of those cures. So, we do have a sense for that. Obviously we get the HAMP data as well. Total modifications, as you indicated, were down somewhat, but we do think that lenders will continue to actively pursue modifications. It's obviously in their best interests to do so. We do a lot of things ourselves to work with servicers, as you know, in terms of having our own analysts in some of our lender shops. We have our own outreach programs that are also very significant in terms of working on what we call our Homeownership Preservation Initiatives, so we do expect the non-HAMP activity to continue to be very solid levels, although the HAMP activity has to climb and we would expect that to continue, although still important.

Matt Howlett - Macquarie

Great. And then, just a last question on those $6 billion of projected lifetime losses you gave us when you priced the deal back in April, have you updated that number? Could you give us any update?

Don Lofe

Matt, it's Don. Actually with the developments that we took in the third quarter, we're in the process of refreshing that we aren't in a position to give any further update at this time. But we are in the process of refreshing it.

Matt Howlett - Macquarie

Great. Thanks, guys.

Operator

Our next question comes from Steve Stelmach from FBR Capital Markets. Your line is open.

Steve Stelmach - FBR Capital Markets

Hi, good morning. Just a follow-up on that cure discussion. Tell me if I'm wrong, but you sound like you changed the reserve assumptions a little bit around cure. Can you just give us a little more color on what was driving that change in assumption? What are you seeing in the data or is there anything else?

Steve Smith

Yeah, I think it's really, Steve, the three things that I mentioned relative to the general macro economic data relative to unemployment trends as well as what we're seeing in terms of home sales, home price, stress in various markets, but also another key factor was the effectiveness of servicer intervention in terms of getting mods on some of the more age delinquent loans was less effective than we thought it would be.

Steve Stelmach - FBR Capital Markets

Okay. That was going to be my second question was, was there a different between the age of inventories and delinquencies there, the cure assumptions among the different buckets of aging, was there differences there? In other words was the change mostly directed towards the late stage delinquencies versus new stage?

Steve Smith

Yes. Most of the adjustment, as we indicated was really the 12/31/09 and prior inventory or in other words primarily related to the 2009 report year NODs and to a lesser extent the 2008 report year NODs and as you see in the financial supplement, we did have a slight increase in terms of the overall NOD mix that was 12 months delinquent or greater from 43% in the third quarter to approximately 46%, excuse me, to approximately 46% in the third quarter from approximately 43% in the second quarter.

Steve Stelmach - FBR Capital Markets

Okay. And then lastly, on the deferred tax asset, correct me if I'm wrong, but $142 million remains, $82 million of which is related to the QBE note. Of that $60 million, what would have to happen to impair that $60 million? Is that an assumption that you're not profitable by 2012 or is there something else that would have to occur to sort of impair that $60 million bucks?

Don Lofe

Steve, it's Don. The second component of that, and just for the folks on the call there, Steve, just to clarify, you're referring to the 142 minus the 82 as the $60 million; is that correct?

Steve Stelmach - FBR Capital Markets

That's correct.

Don Lofe

That is our second tax strategy that we put forward that is the reconfiguration of our previously non-taxable investment income portfolio to a taxable income investment income portfolio. And so, we do not believe at this point in time that there is any material issue with recognition of that additional $60 million because that strategy is well on its way to being implemented and we are comfortable with that situation.

Steve Stelmach - FBR Capital Markets

Great. That's very helpful. Thanks, guys.

Operator

Our next question comes from Conor Ryan from Deutsche Bank. Your line is open.

Conor Ryan - Deutsche Bank

Hi, guys. Apologies if I'm asking you to repeat something, but I was just wondering at the current time how many or at the end of the quarter, how many loans are in mod programs?

Steve Smith

Approximately 18% in total, Conor, of our delinquent loans are in some form of modification trial period.

Conor Ryan - Deutsche Bank

And when you say 18% of delinquent loans, what about loans that have kind of recently been cured that are also in mod programs? Do you have that breakdown?

Steve Smith

Yeah. Those loans would have been cured, so they're not a delinquent loan, so that would just simply be a number that's in our performing book at this point in time.

Conor Ryan - Deutsche Bank

Yeah, that's fine. I was just curious, if you had a percentage of your loans that are in your performing book that have gone through mod programs?

Steve Smith

I don't have that overall number, Conor, off of top of my head. Maybe we can follow-up with you on that number or someone can generate that in the call. But keep in mind, as those loans reinstate, they become current and then as you get new NODs, there's always a mix in new NODs, first time NODs and repeat NODs. That's normal, that's typical. What we'll be monitoring closely, obviously, overtime and I think your question gets at what would be the potential re-default rate, as you get those new NODs and that we'll discuss as that data develops more clearly overtime.

Conor Ryan - Deutsche Bank

Yeah, that would be helpful. Thanks. And then, just on that front, I mean, what percentage of your NODs are re-defaults?

Steve Smith

The percent, it varies significantly. As you know, in the prior report years, with a lot of the early delinquencies or delinquencies coming in less than 12 months due to some of the, you know, things we've discussed on prior calls, in terms of fraud or some of the other activities we saw, the first time NODs were higher. That as a trend is coming down and re-defaults are beginning to normalize to a more normal level, but we haven't quoted that as an ongoing statistic, Conor.

Conor Ryan - Deutsche Bank

Okay, alright. Well, thank you for your time.

Operator

Our next question in queue comes from Alan Connor from Spectrum Advisory Services. Your line is open.

Alan Connor - Spectrum Advisory Services

Thank you, gentlemen, for taking my call. Two quick questions for you. Your claims paid in the third quarter, $323 million, do you have at that count on how many loans that represented?

Steve Smith

Yeah. That should be in the supplement in the roll forward. Don, do you have that number?

Don Lofe

We'll get that here for you.

Alan Connor - Spectrum Advisory Services

Okay. Next question is in your loans in default, you show just shy of 132,000, what your estimated risk exposure is on your current default portfolio?

Don Lofe

Firstly, Alan, to your question on page, it is on page 14 of our supplement. It's 9,079 paid.

Alan Connor - Spectrum Advisory Services

Thank you.

Don Lofe

I'm sorry, could you repeat your second question for us, please?

Alan Connor - Spectrum Advisory Services

Your estimated risk exposure on your current loans in default.

Don Lofe

Yes. It's approximately $6 billion non-performing primary. That's at 9/30/2010. Did we address your questions?

Alan Connor - Spectrum Advisory Services

Yes, you did. We're done. Thank you.

Operator

Our next question in queue comes from Donna Halverstadt from Goldman Sachs. Your line is open.

Donna Halverstadt - Goldman Sachs

Thank you. One of the things you mentioned when you were talking about the increase in the DTA valuation allowance was that you do not expect operating profit in 2011. Had you previously expected such?

Don Lofe

We had anticipated a slight profit in 2011 from an operating perspective. With this adverse development and the uncertainty relative to the macro economic environment, we felt that this was, as I said in my remarks, very important for consideration of additional valuation allowance, as we stated in our remarks.

Donna Halverstadt - Goldman Sachs

Okay. And then, my line was clicking in and out, but did you say that during the first half of 2011 you may repatriate capital from Canada?

Don Lofe

We said for both international operations, that would be Europe and Canada, but primarily this would relate to Europe.

Donna Halverstadt - Goldman Sachs

Okay. And did you quantify that?

Don Lofe

We have not yet done that. We're in the process of evaluating that and obviously that would be subject to regulatory approval.

Donna Halverstadt - Goldman Sachs

Okay. And then you also said you're updating the $6 billion losses to life number. When that work is done, will you also give us your updated view on embedded value?

Don Lofe

Relative to the profitability within the book, is that what you're referring to?

Donna Halverstadt - Goldman Sachs

Yes.

Don Lofe

That's what we would most likely do, correct, but that is part of the process of refreshment.

Donna Halverstadt - Goldman Sachs

Okay. And then, the last question I had, when you look at NIW being up, it was up, but in a smaller amount sequentially, an increase of about 437 versus about 603 in the second quarter from the first quarter, there was also a smaller percentage increases, what were the factors that held that growth back a little bit relative to the second quarter over the first?

David Katkov

Donna, this is David Katkov. Couple of different things and we've actually shared this in previous calls. If you remember a year ago, at this time, we had just made a decision to start to move back into the marketplace. So, we got some very rapid share increase in the first quarter and really moving into the second quarter. So, year-over-year, we've probably doubled our share from where we were a year ago. I think at this point now, given what we want to do in terms of loan quality, and Steve said this in his remarks, we haven't changed our loan quality parameters at all.

It's not surprising that we've stabilized at this point. I think two things need to happen, and Steve's talked about this, we've all talked about this. One, the industry needs to continue to gain share relative to FHA and I think the news there is good. Our estimate is that MICA's penetration in the third quarter was approximately 4% that is up from about 2.9. It's our expectation that will increase overtime.

And then secondarily, I think, we need to see the FHA price increases move through the system and that's not going to happen until the early part of 2011. So, I think, we're very pleased with where we are in terms of our share and the risk profile that we want today.

Donna Halverstadt - Goldman Sachs

Great, thank you.

Operator

Our next question in queue comes from Conor Ryan from Deutsche Bank. Your line is open.

Conor Ryan - Deutsche Bank

Hi, guys, thanks. Just was curious, you have a rough sense for what the cumulative loss percentage would be on new business that you're writing in order to kind of breakeven on that business?

Don Lofe

Conor, it's Don. We would do that as part of the normal course of the refreshment and the work that we've done in the past. We don't disclose that.

Conor Ryan - Deutsche Bank

So, you may disclose it in the future, you just haven't disclosed it yet?

Don Lofe

We're not committing to what that would be, but what we do, do, is we evaluate, as we call it, stress relative to that and to your point, the ultimate loss ratio that would take you to a breakeven perspective.

Conor Ryan - Deutsche Bank

Okay, alright. Well, to the extent that we could get any clarity on that in the future, that would be really helpful.

Don Lofe

Okay. Thank you.

Operator

(Operator Instructions)

Our next question in queue comes from Mark DeVries from Barclays Capital. Your line is open.

Mark DeVries - Barclays Capital

Yes, sorry if you already covered this ground, but by our calculation, it looks like the average premium rate fell about 2 basis points quarter-over-quarter. Is that just a product of doing more, low premium low LTD business and having the higher premium business roll-off or is there more at work there?

David Katkov

This is David Katkov. No, your analysis is spot on. We, again, have talked about this in previous calls, but we still are remaining quite cautious about reentering certain markets in the country. So, as a result, willing to do 95 LTDs for example and certain MSAs is very limited, if at all and that has an affect of depressing the average premium.

Mark DeVries - Barclays Capital

Are you near a bottom, you think, in that average premium rate?

David Katkov

We typically haven't forecasted that, but let me at least make this statement which I think is consistent and that is it is our expectation that overtime markets will heal and as they heal, we'll be able to write more 95 premium business going forward, which, of course, would have the effect of increasing the average premium.

Mark DeVries - Barclays Capital

Okay. It looks like there was also a pretty big drop in the average claim size. Is there anything one time in that or is that more of a reasonable run rate going forward?

Don Lofe

Mark, it's Don. I'm not going to comment on a run rate going forward, but that's correct and that is because of our denials, take that average claim size down.

Mark DeVries - Barclays Capital

Okay.

Steve Smith

I guess the only other thing I would add to that, Mark, is if you look at our average risk, that's also decreasing and that's a function of obviously the mix of the NODs that we're getting. We are seeing less NODs from some of the more problem geographies as well as some of the more problem product types.

Mark DeVries - Barclays Capital

Okay. And then, just one last question, Don, on when you'd realize the value of the DTA that you've, you know, set an allowance against. When you return to profitability, and you make that assessment, is it as simple as just reversing the allowance, you get an immediate book value hit or will it come in overtime through a lower GAAP tax rate?

Don Lofe

Mark, good question. Firstly, there has to be a sustained level of profitability, so in other words, if it is just one quarter, you really would have to challenge whether that was a sustained period of time. So that's the first premise. The second thing is that it clearly depends, as you pointed out, on the, facts and circumstances. We would believe, though, once we reach that conclusion that we could reverse that allowance. We believe a material amount of that would be recognized at that point in time. But there could be, if you will, I will call this word somewhat lumpy adjustments, depending on the facts and circumstances.

But it is not going to be over to your question very, very extended periods of time that, in other words, would amortize back to the book value and income statement. That's not the concept of the establishment of the valuation allowance.

Mark DeVries - Barclays Capital

Okay. Thanks.

Operator

Our next question in queue comes from Matthew Howlett from Macquarie. Your line is open.

Matthew Howlett - Macquarie

Thanks for taking my follow-up. Just could you tell us the latest from Washington in terms of GSE reform and the MI role in high LTV product? What form do you expect it to take and how definitive is it right now that you'll be included, at least MI will be included into GSE reform?

David Katkov

It's David Katkov. I guess a couple of things. One, I think the most important thing that we all ought to be watching is the definition of a qualified residential mortgage. As you know, there are several regulators working together to do that. Our expectation is that definition will be completed by the late first quarter of 2011.

As you may also know, one of the parameters that Congress gave guidance to the regulators to a qualified residential mortgage included mortgage insurance. So that wasn't by accident. I think both, as a company and then working through our trade association, we made the case that our model was very successful, in spite of all the stress that we've shared on conference calls, the truth of the matter is the model worked, as it was intended and it is our opinion, and I want to emphasize it's our opinion that that has been well recognized in Washington by key people in treasury, OCC and others.

Now, there's a lot of green between here and there and we're going to continue to stay on point, but I guess at this point we'll know more as QRM is defined and then I can't for a minute speculate what will happen ultimately with Fannie Mae and Freddie Mac other than what we've said repeatedly. We're absolutely engaged in the process. We think our story is a good one. We think it's recognized by Q regulators, including the administration.

Matthew Howlett - Macquarie

Okay, great. And then, you said you don't want to speculate on how Fannie and Freddie, how they look eventually, but is there any scenario where the counter party risk come and be included in the GSE reform, in other words, if the banks decided they had to purchase PMI, is there any scenario that where that could be taken into account going forward?

David Katkov

Matt, could you help me understand the last portion of your question?

Matthew Howlett - Macquarie

Just if the banks, we've heard scenarios where the bank would have to buy the mortgage insurance at that point. At the time, they would look at the individual credit for each MI that they're buying from and didn't know if the ratings and don't really seem important at this point in time, would that come back into play under a different GSE format?

David Katkov

Sure. Thanks for clarifying it. And I understand. Well, that particular scenario is being played out today. Since there are, to the best of my knowledge, short of one insurer no investment grade mortgage insurers today, the large financial institutions are doing their own credit analysis, so we've been making those kind of presentations for the last couple of years.

I think it is a fair statement that the banks have disconnected themselves largely from the rating agencies. They're very good at fundamental credit analysis and thus far we feel that we're a reliable counter party. That may change overtime, but we haven't had that as a major issue for us today.

Matthew Howlett - Macquarie

Great. Thanks for the clarification.

Operator

Our next question in queue comes from Edwin Roshan from Height. Your line is open.

Edwin Roshan - Height

Good morning, everybody. Thanks for taking my call. If we look at [K-sheller], which was, I guess, less than robust for the month-over-month data. And then, there's all this talk about the fed in QE 2 and it really seems like they're concerned about deflation, what are some of the road posts that you all are looking for to get a sense that housing is really more stabilized and could then cure or heal itself as opposed to this constant concern that housing is going to decline another 10% or so?

Steve Smith

Well, obviously, we're looking at, the general supply and demand factors overall. We're looking at affordability, which, as you know, with current interest rates and current home prices is quite high. As a part of the fundamentals, you're looking for, job growth and stability in that job growth or reductions in unemployment claims, which is, I saw the report this morning, was somewhat favorable versus prior trends, but still not where it needs to be.

You're looking at foreclosure, some stability in the foreclosure process and inventories, so consumers and families can be more certain in terms of what's likely to happen in their local communities. And as you know, that varies significantly from MSA to MSA. So, those are some of the things we're looking at, Ed.

Edwin Roshan - Height

Okay. Because it just seems like, Steve, a number of things you point out there, it seems like we have a lot of hiccups and there's no clear direction just yet. You know, however, if we look at, some of your core operating features, you see the credit, the peak is here or near here and your new insurance written is improving and we really have not seen much of a benefit from it the change in the FHA pricing just yet. So, it seems like it's that uncertainty that's going to continue to weigh on PMI's performance going forward despite better fundamentals.

Steve Smith

Yeah. Granted that, Ed, there definitely is that uncertainty. One of the things, I would add, though, just in terms of the supply and demand factors, is general demographics and household formations. If you would look at our material that we published and some of the material that David Berson, our economist publishes and we report that information on a quarterly basis, we do see favorable trends in the overall demographics, loans are very affordable, as you know, both from an interest rate standpoint and the sheer price of homes today.

We do need to begin to remove some of this uncertainty, though, relative to foreclosures. As you can imagine, there's a lot in the press. We've seen it a lot particularly relative to these moratoriums in the last 30 days and it creates uncertainty and doubt with consumers. There are consumers out there who would willingly buy if they felt there was a little bit more certainty in terms of the foreclosure situation. So, we do need to have stability in that regard.

David Katkov

Ed, this is David Katkov. I just want to raise one point and this actually gets to part of an answer to Matt's previous question. One of the things that we're encouraged by is the size of the total insured marketplace. I think that's a very important metric and as you may or may not know, if you look at private mortgage insurance, FHA and VA, it's at a historic high in terms of total insured. So, our opportunity, it's a challenge, but our opportunity is to get a larger piece of that pie and so as we do, as we've said, we expect to do that over time, I think that at least from a top line perspective, we've got more upside than down.

Steve Smith

And I guess, I would add to that, too, Ed, if you look at the core fundamentals, I think you're right in what you said about core fundamentals, but part of that core fundamentals, as you know this year, is a substantial portion of the total one to four family residential market or refi and less so purchase money mortgages. If you look out over a long horizon, we do see that shifting and obviously we have higher share penetration in purchased money mortgages than we do on refi loans.

Having said that in terms of values and what you would expect to be lower appreciation levels versus historical norms, at least in the early years of '011 and '012, we may actually have a pick up in terms of our share in terms of refis overall. So, what David's talking about in terms of penetration of the insured product, which includes FHA, VA and the private mortgage insurance industry, still should be quite robust in the period that we're talking about. You combine that with new household formation and fundamental demographics where our product is particularly appealing to begin with, we think from a more longer-term standpoint the fundamentals are good for our industry.

Edwin Roshan - Height

So, I guess one other question along those lines is there has been, and I don't think it's getting a lot of traction, but there has been some noise coming out of DC about, requiring higher down payments for mortgages, specifically if the government is going to have some involvement with it and with the expected turn on November of the house to go to Republican, is that a concern, like a high level concern or is that something that you have on your radar and, with a mixed house and senate, you're not too worried about?

David Katkov

I'm going to answer, Ed, this is David again. I would say it absolutely is something that's on our radar and it's not new. You know, as we've been working in Washington, again, as a company, but also through MICA, I can tell you, I'm not going to tell you now. I know which senators and house people have talked about that and as much as anything, I think they're testing the extremes because the reality is no one is going to put down 20% and have a market that's a sizable at all.

But I think they're trying to drive home a particular point. So, it's on our radar. You don't minimize any risk today in the political environment, you would be naive to do so. This is probably not the issue that keeps us up at night as much as perhaps some others might. That would be the way I would answer it.

Edwin Roshan - Height

Great. And then, one more, if I may. Just on the foreclosure moratoriums, Banc of America said they looked at 100 and some odd thousand and found just a handful of errors here and there. When they have a moratorium like that and they go through and they look at the errors, is PMI on the hook for that moratorium period or for the expenses or does your share of the expenses stop because of the moratorium? And specifically for ones where they didn't find any errors.

Steve Smith

Yeah, I think if the moratorium is a self imposed by a lender due to their own operational issues, in that situation, then we would not be on risk for that.

Edwin Roshan - Height

Okay. And so, do we see any of that in this quarter or do we see that in next quarter?

Steve Smith

The claim payments are pretty well locked in, generally speaking, in terms of what we would expect for the fourth quarter. So, any effect on moratoriums would probably be more noticeable in 2011, although, as I indicated earlier in the conversation, while there may be some delay in claim payments, we're not expecting our overall risk profile to change.

Don Lofe

It wouldn't really be a big deal at all?

Steve Smith

We're not modeling it to be a big deal.

Don Lofe

And, Ed, it's Don, we have to look at that relative to liquidity, but that's very manageable.

Edwin Roshan - Height

Great. Thank you very much for taking my questions.

Operator

Our next question in queue comes from Steve Stelmach from FBR Capital Markets. Your line is open.

Steve Stelmach - FBR Capital Markets

Good morning. Just one real quick follow-up on new business. It looks like single premiums are getting to be a greater and greater share of new insurance written. How should we think about that from a premium perspective versus monthly, over the lifetime of the policy? I mean, is it higher, is it lower than the monthlies and are loss experience with monthlies versus singles any different?

David Katkov

Steve, this is David Katkov. First, you're right, your observations are correct. It turns out the single premium product has been a very effective way for us to compete against FHA, particularly in the 90 LTV space, which as you said is our favorite space today. In terms of, if I understood the last portion of your question is do we have a different, was it different loss expectation?

Steve Stelmach - FBR Capital Markets

Two-part question. One is, is your lifetime premiums, higher on a monthly basis or on a single premium perspective or no different? And then, the second part of the question is, are losses any different? Pretty much the same credit, just where they decide to go single versus monthly?

David Katkov

No difference in loss expectation and no difference in lifetime earnings.

Steve Stelmach - FBR Capital Markets

Right.

David Katkov

But difference in cash. Obviously with singles, we get it up front and monthly we get it over time.

Steve Smith

And let me just talk a little bit more about that particular product. Prior to the FHA price changes, that product was probably more relevant in terms of competing against FHA. With the effect of the price changes, our monthly premium, as you know, is the more dominant form of payment for mortgage insurance and it's made us much more competitive relative to monthly premiums, so I would expect, quite frankly, a shift downward in the overall level of single premium over time.

Steve Stelmach - FBR Capital Markets

Okay, great. Thanks, guys.

Operator

(Operator Instructions)

I show no further questions in queue. I'll turn the call back over to Bill Horning.

Bill Horning

Thanks, Jeremy. This concludes our question-and-answer portion of the call. Thank you for joining us on today's conference call and as always, we thank you for your ownership and interest in the PMI Group.

Operator

Again, this does conclude today's conference call. Please disconnect your lines at this time.

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